Hey BP Nation,
Longtime viewer, first time poster.
My partner and I just closed on a duplex in Chattanooga, TN. I currently live in Chattanooga and my partner lives in Portland, OR. We're wondering the best way to set up our business for banking and tax purposes. I know having a LLC/LLP would not offer a lot liability protection as the property is titled in our personal names. However to set up a business account we have to have a "business". Can we just use our partnership agreement? Do we have to file it with the state first? Can we just use a separate personal checking that we both are signers on for the rental business?
Also, what's the best way for taxes, should we set up an EIN to file or can we split (50/50 partnership) the profits/loss on our individual returns?
Thanks in advance!!
Brad Norris and Tip Lee
congrats on your duplex @Brad Norris ! You are correct on the liability protection with the title in your personal names but an LLC will provide you guidelines of your operating agreement. Advise you guys talk to your attorneys and look at grabbing an umbrella insurance policy sine the property is in your personal names.
I agree get umbrella insurance if possible. Id start by talking to a banking and asking what they require for a business account. Often a DBA and partnership agreement is sufficient.
You have options: If you want to set up the LLC you can quit claim the duplex into it. If you're worried about chain of title/name search and not being anonymous I wouldn't worry too much about that aspect. Insurance will always remain your first line of defense anyway and to echo @Jeff Holst's comment you should have an umbrella because there are things that can happen on the back end that have nothing to do with the LLC and still affect you personally.
The biggest issue to me is the F&E (business income) tax you'll be subject to with the LLC. If you keep title in your names (or set up a trust) you're not subject to income tax in TN. The LLC changes that, plus you have filing fees and added compliance costs (accounting) to do deal with. If you plan to go slowly it might not make sense to do the LLC until you have a few more properties. Most of my properties are in entities, but I have a number that are not.
You may want to see if you and your partner can own the property as tenants in common. This will not require an additional tax filing requirement of a partnership return.
Instead you and your partner would each report 50% of the income and deductions directly on your tax return form Schedule E.
If you are looking for protection - you can obtain an insurance coverage as others have mentioned.
The TN LLC cost is pretty high according to our CPA. Suggest you take a look at the option to form LLC in a state is more cost efficient. We current have a MI LLC that we did a 1031 exchange to a property in Chatt. Our MI has much low cost.
Any recommendation for umbrella insurance policy provider / agent?
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